Punchinello’s Chronicles

October 3, 2008

Trade Deficits: Apparently We can’t Win

Filed under: Surely a Jest? — Punchinello @ 2:39 pm
Tags: , , ,

How come we aren’t taught basic economics (including international economics) in grade school?

I’m looking back over my life and education, thinking about how I learned about money, when this happened, and what it was that I learned. More often than not, either I got curious about what I thought was a simple question, or I read something odd and wanted to know a bit more. The Internet has certainly made it easy to get information, and of course the local library is a never-ending excellent source.

But I didn’t learn anything at all about money and finance in school. I wonder if that’s a conspiracy of some sort? The more stupid we are, the American public, the easier it is for the government to screw us in the wallets.

Recently, I’ve been interested in economics because I’ve had an ongoing interest in what’s call a “zero sum equation.” The belief that wealthy people have a moral obligation to “give back” to a community, neighborhood, or the society at large is ridiculous. But where did it come from? Where did this undefined claim to moral demand begin?

Lester C. Thurow wrote a book called, “The Zero-Sum Society” back in 1980. There already had been economic discussion coming to popularity back in the late 1960s, so I started with Mr. Thurow, a highly accredited economist. From there, I’ve been reading about international trade and trade deficits.

It’s astonishing! From what I gather, there are two key things being measured: capital, and foreign exchange rates. Capital is the core concept of the economic philosophy of capitalism.

Simplistically, capital trade balances are figured as to how many foreigners (people outside the US) want to hold assets in the US in relation to how many Americans want to hold assets outside the US.

Assets would mean stores, buildings, manufacturing plants, assembly plants, real estate, land, farms, and anything else that generates “something useful in making valuable stuff.”

Foreign exchange seems to mean money itself. If I want to buy a shirt in France, I can’t just send 10 dollars (American) to someone in France and get the shirt mailed to me. It may look like that, if I use PayPal or something, but that’s not technically what happens.

To buy my shirt in France, I first get the price in francs. I then take 10 American paper dollars and send them to whatever central bank in France. That bank takes (and keeps) the paper dollars. They “exchange” those paper dollars for francs, then send those francs to the person who owns the shirt.

The “foreign exchange rate” is negotiated by someone. It could be the central banks, the governments, or the open market place. That rate is how many French francs equal 1 American dollar.

At the end of the day, France now owns the paper dollars I sent over there (the governments and banks actually did the transfer). I get my shirt. The shirt guy gets French francs.

The way economists would say it, from what I gather, is that the entire country of France somehow decided to buy 10 American dollars and send us a shirt. Confused? No doubt! Because I’m buying a shirt, I’m sending dollars outside the country, and the value of the dollar is high. The French want the dollars.

But if I sell a shirt to a guy in France, then I want francs, not dollars. Therefore, the value of the dollar is down. All because I want to sell my shirt to some “government” (?) outside the country! What happened to the guy who wants the shirt? It’s a mystery.

A trade deficit happens when more people outside the US own or control assets outside the country than Americans own or control outside the country. Note that this is all outside the country. It also happens when people outside the country buy things from America. They send us their money and don’t want our money, they want our stuff. So the “value of the dollar goes down.”

When the value of the dollar is low, does that mean our money sucks? Apparently not. It means that people all over the world are buying lots and lots of stuff, sending us their money so we can keep it. WE aren’t buying their stuff, so our dollars are sitting here, not there. The value of our dollars, according to economists, is going down.

But…we’re selling boatloads of stuff to everywhere in the world!

Here’s another thing: If we bring stuff in from outside the country, that’s an import. If we send something outside the country, that’s an export. When we import more than we export, we have an international trade deficit. (If we buy more stuff than we make, that’s a productivity problem, or consumer debt problem.)

Here’s the rub: An import or export is anything that crosses the border, through Customs. Nobody cares who was responsible for making that thing, it’s irrelevant in terms of import and export “balance.”

In other words, if Intel, an American company, decides to build a chip-making plant in China, that’s a building. Intel has increased their capital assets in a foreign nation. America gets a positive capital balance. But!…when Intel brings those chips back to the US for sale in a computer, we technically are “importing” the chips.

Who cares that the chips are American, owned by an American company! They were moved across Customs from outside to inside the country. Ergo, economics tells us that we imported those chips and that means more imports, not exports.

The international trade deficit includes ALL those items that are manufactured by American companies, part of the American economy, but that are made outside the US and brought back here!

I’ve been vaguely hearing about the growing trade deficit all my life. I thought it meant that the rest of the world is growing and building, making and selling, and that the US is just sitting around. We’re doing nothing, the economy is dead, we’re going broke, and life is bad. That’s what I sort-of-kind-of believed, knowing nothing at all about economics!

Instead, it turns out that “trade deficit” is an accounting problem with technically correct statements that have very little to do with each of our everyday lives and times. In fact, the more the American economy grows, develops, creates, builds, and expands, the more WE have a trade deficit! Not the rest of the world!

How stupid is that?

If I have a business and start growing and expanding, selling more and more stuff to the rest of the world, then I’m a success, right? Wrong! I’m helping to grow the international trade deficit! Every item I sell to the world means I’m bringing more and more foreign money here and not selling “dollars.” I’m helping to make the dollar “less valuable” and making the dollar “weak.” Eh?

So the more I sell, the more exports are leaving the country, but the less our money is worth? Does that make sense? I dunno, I’m not an economist. All I know is I’m to blame for increasing the deficit in foreign exchange.

If I decide to open up a manufacturing plant outside the country, I’m reducing the capital deficit. I’m increasing the capital assets outside the country. I’m an American, and own that plant in a foreign nation.

To balance that reduction here, and increase elsewhere, some foreign company would have to open up a manufacturing plant here in America. But everything I manufacture and sell back here to an American public, that’s an import. We then import more than we’re exporting.

So the more I sell my own stuff that I had manufactured elsewhere, the more I’m importing. That means the entire country is importing more than its exporting and we have a capital trade deficit? Or is it a foreign exchange deficit? What the hell…I thought I was doing good, thinking “Big,” and being successful!

I swear…this just gives me a headache! The hell with this “trade deficit” nonsense. It makes no sense

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